Successful Consultants on the Side Figured Out the Right Way to Price Their Work
Because without knowing how to, we will always run into losses.
I get it. You are frustrated.
You have done your best to control the cost of service. You ensured timely completion of work so no delays can eat into your margins. You actively aligned expectations with clients to prevent scope creep from popping like weeds.
I know. You worked hard to run your 1-Man consulting practice.
Yet, that is not enough for your consulting side-hustle. Despite your best efforts at cost control, scope control, and client alignment control, you may not be making profits.
And you start wondering if there are better ways to price your services.
I am here to tell you that the answer is YES.
The World of Consulting Calls it The Estimation Model
Breathe in deep and accept what I am going to tell you.
There is no 100% accuracy in pricing when it comes to consulting or any other service-based business.
Zero. Nadda. None.
Service-based business measures output against 2 variables. These are the 2.
- Client’s budget
- Time to complete
Honestly, that is it. And the trouble with these 2 variables is obvious. It defaults to our judgment of the commercial deal we are presenting to our clients.
And, as you know, judgment is a morse code for experience and exposure. The longer we are in the consulting industry, the better we get at pricing our work for a profit.
Let’s Begin with Mr. Client’s Budget
This is a straightforward approach. The stack of cash Client A puts on the table equates to the amount we earn.
Let us assume, hypothetically, that the amount is $100. The client is willing to put $100 into our pockets for a 2-month project.
Now, ask yourself these questions.
- What is your billable rate?
- How much would it actually cost for you to deliver the project based on your billable rate?
You may not have the answers now. No worries. Let us work out the sums.
There are a couple of ways to derive your billable rate.
- Take your monthly salary and divide it by 22 mandated working days in a month, and then divide it by 8 work hours a day
- Benchmark against industry peers
This is what the first approach looks like. Assume that you earn $5,000 in your day job. Your hourly billable rate will be $28.40 ($5,000 / 22 working days / 8 working hours).
Take note. This method works when you extend your day-job experience and competence into your 1-Man consulting practice.
It is easy if you want to benchmark against your peers. Call and ask them how they price. However, I do not recommend this method as your client value proposition is different from theirs.
Of course, the choice is yours.
Moving on to the second question.
Let us assume that you need 10 hours to deliver the project to the client. Therefore, your gross estimate price to the client will be $284.00 ($28.40 per hour * 10 hours).
Therefore, one of the following outcomes will be materialized if you choose to take on this consulting project.
- You bank in a loss of $184 ($284 — $100) under the name of client goodwill, hoping that they will sign the next big deal with you in the future
- You tell the client that you cannot deliver the consulting engagement under $100, and they should consider increasing their budget
- Or you work till you sweep $100 off the table. That would be 3.5 hours of work ($100 / $28.40). And then you stop
This estimation model is based squarely on the client’s budget. That is assuming that you managed to find out how deep or shallow their pockets are.
Now, what if they refuse to tell you?
You Need to Find Out the Amount of Time Required to Get Your Work Done
You can use the time-to-complete model if you are completing on your own.
This price estimation model is intuitive to you, even if you have not heard about it from your consulting peers. Experienced 1-Man consultants can complete the 1st run of this estimation model within a couple of hours. Here’s how.
Ask yourself how long it takes to complete 1 standard consulting engagement.
Let us assume that you are rolling out a website for a client. The standard website you deliver contains the following 5 web pages.
Home takes 2 days.
About Us takes 2 days.
Content blog takes 2 days.
Service Catalog takes 4 days.
Payment gateway integration takes 2 days.
In total, you will require 2 + 2 + 2 + 4 + 2 = 12 days. Let us take the daily billable rate computed in the section above, $28.40 * 8 = $227.20, for completeness of illustration.
The bill to your client based on a standard website for delivery would be $227.20 per day * 12 days = $2,726.40.
This is the gross price. I have not included taxes applicable to your country, additional days piled in for contingency, or situations when clients do not want a Content Blog.
And because you have worked out your hourly billable rate and the time required to get work done, you know how to negotiate with your clients.
They know exactly why you quote them $2,726.40 and the breakdown of the cost constituents.
I have another tip for you. You want to make sure that you earn a profit from your deals. Therefore, consider slapping a percentage premium on top of your gross price.
I like to slap a premium within 12% — 20% for a margin of safety on top of the contract value. In the event that my margins get eroded due to unforeseen circumstances (such as client requirement changes), I will still earn a profit even though it is lower than intended.
Parting Keynote
Pricing estimation models are necessary for aspiring 1-Man consultants to price for profits. After all, no one wants to work for a loss.
At least, not me.
Therefore, we learn to refine our pricing estimates as we accumulate experience and exposure in the consulting realm. We will not get it correct at the beginning. With time, we know exactly what to do.
And for 1-Man consultants currently arbitrarily pricing their services, do up your game.
Develop your own price estimation models. The client budget and the time-to-complete model will be a good start.
As a content contributor, I write my observations from daily life and my business exposure. Because our life experience is the bedrock of our unique perspectives.
